In this podcast I do a book review of Ujjivan Transforming with Technology written by Subir Roy. You can listen to the podcast below.

You can also read the book review below:

Microfinance has brought about a remarkable change in the lives of millions of rural and urban poor. By lending few thousands of rupees to meet the credit demands of these people, micro finance companies have bridged a major gap and brought the poor and credit unworthy people to the mainstream. There are many NBFCs and MFIs that have come up over the past decade. The two most promising and prominent ones being Ujjivan and Bandhan. This book talks about the former.

History of Micro-Finance

The genesis of micro-finance is attributed to Muhammad Younus. In the late 70s, Muhammad Yunus, who was at the University of Chicago, returned back to Bangladesh only to find his country reeling under poverty. He found out that the lack of credit was a major cause leading to poverty. He started the concept of micro-finance by lending small amounts to the women to weave baskets. This idea turned out to be a success and the government of Bangladesh institutionalized it and started Grameen Bank.

In India, public sector banks used to lend in a big way in rural India. However, they faced a lot of issues due to defaults in repayments. This led to the curtailment of loans to marginal people. This led to organizations collectively called Self Help Groups (SHGs) step in and act as intermediaries between Banks and borrowers. There were three major SHGs or NGOs that pioneered this concept. SEWA, MYRADA and PRADAN. They were supported by NABARD. In the late 90s Small Industries Development Bank of India (SIDBI) launched a new program under this program few MFIs grew into bigger organization. Some of the known ones being SKS Microfinance (now called Bharat Microfinance) and Bandhan. At the dawn of the new Millennium few new NBFC-MFIs emerged. Among them was Ujjivan which concentrated mostly on the Urban-poor.

Birth of Ujjivan

Samit Ghosh’s who got an MBA degree from Wharton and worked as a banker for close to 30 years decided to work for the poor people. He read different books on Micro finance and visited offices and customer meetings of some of the microfinance institutions to get a first hand experience of the microfinance industry. He attended a workshop organized by Grameen Bank which gave him further insights into microfinance and taught him the process of starting an MFI. All the learnings from these experiences led him to focus on two things (a) To serve the urban poor, using microfinance and (b) use technology as an integral part of the lending process. Thus the idea of Ujjivan was laid.

Now, in order to get the company going, there were four things that the company needed (a) Initial Capital (b) Office Space (C) A team (d) Target customers. The initial capital of close to 2.5 crores for Ujjivan came from Samit himself, his close friends and from Bellwether Microfinance Fund. The office space kept shifting from a guest house to MphasiS building and then back to a flat in Indiranagar and finally to their current office in Kormangala in Bangalore. The initial employees were hired from Ghosh’s circle of friends from Banks, couple of people came in from Grameen Bank to aid in setting up the structure. In order to identify the customer base, Ujiivan did a study in collaboration with Delphi Research Services in the year 2005. The study led them to their target customers, i.e. urban poor women. With all these things in place, the company approached the RBI for NBFC license and they received the license in less than 50 days.

In 2006, Ujjivan started its operations and launched a pilot scheme in Bangalore. At the end of the trial period Ujjivan learnt the following: Its customer base was women in the age group of 18 to 55 years who had a monthly income of 4,000 to 6,000 rupees and had expenses in the range of 2,000 to 4,000 on items like food, housing, medical expenses. Nearly half of these women were salaried and worked as housemaids, teachers and sweepers etc. Another 40% were self-employed and were selling fruits & vegetables, worked as tailors and in petty shops etc. Ujjivan started to give loans to these women. The loan amount was in the range of 6,000 – 12,000 rupees at an interest rate of 24-26.9% for a tenure of 12-24 months. Ujjivan charged an upfront fee and enforced a life insurance policy on each borrower to hedge against death of the borrower. During the initial phase, Ujjivan managed to obtain foreign direct investments from Unitus and from Michael and Susan Dell Foundation (MSDF). During the same period the company moved to its office in Kormangala.

Growth of Ujjivan

After the pilot phase that ended in April 2007, Ujjivan embarked on a very high growth path which led to a multifold increase in branches, customer base and employee strength. By 2008 Ujjivan introduced Individual Business loans, education loans for the kid and housing loans. The company mandated that all borrowers should be covered by life Insurance.

Andhra Crisis

The Crisis in Andhra Pradesh marked a major turning point for the Microfinance industry. The Andhra crisis started in the early part of 2010. The news channels started airing the stories of people committing suicide as they were not able to repay their loans. Some women even complained that they were being forced to go into prostitution in order to repay the loans. The Andhra Pradesh Government issued an ordinance that came into effect on 15th October 2010 which restricted MFI operations. RBI came up with a committee to address this issue. By December 2010 the committee submitted a report and recommended that the NBFC-MFIs were allowed to charge interest rates up to 24%. The loan ceiling was set at Rs 25,000. The loans did not need a collateral and no prepayment charges were to be levied. These guidelines paved the way for a structured and formal approach to the MFI lending process.

Post the crisis Ujjivan took many prudent measures like cutting the number of branches, reduced the lending rate, reduced new customer acquisition rate and merged nearby branches. All these steps led to a reduction in its operational expenses. Ujjivan did two important things which helped it tide over the situation. Firstly, it took a humane approach and increased the repayment window so that people under stress could repay back with some flexibility. Secondly, the company setup branch-wise action plan to handle the situation differently at branch level. Special collection teams were set up in the branches where delinquencies were higher. These steps helped the company to tide over the crisis.

Back to the Growth Path

Between 2012 to 2016 the company returned back to the high growth path. During this second phase of rapid expansion, the loan book grew at a CAGR of about 66%. Number of customers grew from 1 million to about 3.3 million. Revenue grew at the rate of 60%.

Technology: Ujjivan introduced document management systems to speed up the loan processing process. The company also introduced a system called Artoo that works with handheld devices which was used for customer acquisition. Ujjivan uses the Finacle Software for its core banking solution and Sun Solaris super cluster from oracle for the backend cloud. The Field staff use tablets for customer acquisition, servicing and loan management.

Risks: Microfinance is filled with multiple risks. Incompetent/unethical employees, dishonest customers, Opening in high risk areas are some of the risks that the company faces.

Small Finance Bank: On 16th September 2015, Ujjivan got ‘in-principle’ approval to operate as a small finance bank. As a bank Ujjivan could now take deposits which are a low cost source of funding. Moreover, by being a bank, it gets legitimacy and is not subject to the whims and fancies of local leaders who could instigate people to default against loans by MFIs.

Being a bank comes up with its own complexities. Ujjivan has to adhere to the regular banking norms like CRR, SLR etc. Additionally, it has to adhere to Small finance bank specific guidelines like (a) Seventy-five percent of their lending has to be to the priority sector. (b) Fifty percent of the loans have to have a ticket size of less than fifty lakhs and (c) Twenty five percent of the branches have to be in the unbanked areas. Also, as a bank it was mandated to reduce the foreign shareholding to 49%. Now, In case of Ujjivan 91% shareholding was with foreign investors. In order to satisfy the foreign shareholding criteria, Ujjivan decided to file for an IPO.

IPO: In May of 2016 Ujjivan raised 882 crores via the IPO route which was subscribed 41 times. The anchor investors subscribed for 265 crores and included names like ICIC Prudential Mutual Fund, Tata Mutual Fund, Birla Sun Life Mutual Fund, Sundaram Mutual Fund etc. The company got listed on the stock exchanges on 10th of May 2016.

Demonetization:  On the 8th of November 2017, government announced Demonetization of Rs. 500 and 1000 rupee notes. This hit the micro-finance industry in a big way. Ujjivan was not immune to the ramifications. The impact was seen in three phases. In the first phase its customers were caught in the cash crunch due to non-availability of the legal tender. In the second phase many of its customers faced loss of income due to either loss of job or being paid in older currency notes. In the third phase Ujjivan saw local politicians in many parts of the country asking the public not to repay the loans with a promise that the Government will waive off the loans. Ujjivan took help from MFIN, NABARD, SIDBI, RBI, Chief Secretary, Finance Secretary and other institutions to send out the correct message to the masses that no loans have been waived off. Initially there were lots of repayment defaults. Later on, as the credit crunch eased, people started to payback the loans.

The Future: Ujjivan started as an SFB on 6th of February 2017. This marks a new chapter in the life of Ujjivan. Ujjivan has embarked on a new journey as a bank to serve the unserved and underserved in a comprehensive way.

Overall the book presents the positive side of Ujjivan. Author interviewed different people from Ujjivan and people outside of Ujjivan as well. The book dishes out a lot of numbers and financial Jargons. Hence, one needs to have some knowledge of finance to understand the book. At times the book gets repetitive. If you are a keen follower of Ujjivan then you can pick up the book to get insights on Ujjivan as well as the microfinance industry. Else you can safely ignore this book.